Why did Trump suddenly "let Powell off the hook"? Thanks to Bessenet and Lutnik.

Trump changed his mind, partly because Treasury Secretary Mnuchin and Commerce Secretary Ross privately warned Trump that firing Powell could trigger market turmoil and legal disputes.

Author: Fang Jiayao

Source: Wall Street News

Despite Trump’s escalating criticism of Powell last week, he publicly stated on Tuesday that he does not plan to fire Powell and accused the media of misrepresenting his intentions.

On April 23, Eastern Time, media reports citing informed sources stated that the White House had taken Trump’s public criticism of Powell very seriously, with even a White House lawyer privately researching legal options for removing Powell, including whether he could be removed for “just cause.” According to the law, Federal Reserve governors can only be removed for just cause before their term ends, and courts typically interpret “just cause” as misconduct or inappropriate behavior.

Additionally, Trump’s change of mind is related to Treasury Secretary Mnuchin and Commerce Secretary Wilbur Ross, who warned Trump that firing Powell could trigger market turmoil and legal disputes. Ross told Trump that firing Powell would not change interest rates, as other members of the Federal Reserve might maintain a similar monetary policy to Powell.

The market votes with its feet, Trump abandons firing

The media pointed out that Trump’s remarks indicating he “does not intend to fire Powell” suggest that he and his advisors are still closely monitoring the reactions of Wall Street and large corporations.

While Mr. Trump insists he is immune to market volatility, he and his advisers are clearly aware of the market’s resistance to his aggressive trade and economic moves, and are gradually compromising. After all, White House spokesman Taylor Rogers has said that presidential advisers will advise Trump, but ultimately the decision maker will be the president himself.

Tesla CEO Elon Musk stated during Tuesday’s earnings call that he would advocate for lowering tariffs in conversations with the president. Musk said, “Whether to heed my advice is up to him.” Due to a decline in Tesla’s stock price, he will reduce his working hours on DOGE, and Tesla’s global sales have also dropped due to Musk’s relationship with the government.

During his first term, Trump frequently criticized Federal Reserve Chairman Powell and attempted to influence Federal Reserve decisions through social media and other means, but the effect was limited and did not have a substantial impact on the independence of the Federal Reserve. However, concerns in the market regarding the independence of the Federal Reserve have significantly escalated, primarily for two reasons.

Firstly, Trump is more inclined to challenge institutions and legal norms during his second term. The U.S. Department of Justice is attempting to overturn a 90-year-old legal precedent, which is an important safeguard against the dismissal of Federal Reserve officials before their terms expire. Many legal experts believe that once this precedent is overturned, the independence of the Federal Reserve will be seriously threatened.

Secondly, due to the fact that Trump’s tariffs are much larger than during his first term and cover a wider range, this may lead to more serious inflation issues this year. Trump’s tariff policy undoubtedly makes it more difficult for the Federal Reserve to weigh the trade-off between inflation and economic growth.

The cost of firing Powell is too high and the effect is limited

However, in reality, Trump faces many obstacles in firing Powell.

On the one hand, the independence of the Federal Reserve is seen by bond investors as an important pillar of the U.S. financial system. Many investors believe that the Fed should not be subject to government intervention. If foreign investors are concerned that the U.S. government will intervene in the Fed to tolerate higher levels of inflation, they may reduce their U.S. bond purchases, pushing interest rates higher.

Former San Francisco Fed senior advisor and chief economist Tim Mahedy stated last week that if Trump successfully forces the Fed chair to step down, the market reaction would be catastrophic. The pain would come so swiftly and severely that the president would be compelled to immediately retract his commitments or face a systemic financial crisis.

On the other hand, many Wall Street analysts believe that even if Trump fires Powell, it will not easily change the Fed’s monetary policy, because the rest of the Fed’s governors may not support a rate cut. Last month, for example, Trump promoted Bowman, the Fed governor he appointed during his first term, to vice chair for banking supervision. Bowman, one of the Fed’s most outspoken officials, has warned of the risk of cutting interest rates too early or too soon.

Powell has always said that he does not believe the Fed’s independence is threatened. Powell believes that if the Fed chair is fired because of policy disagreement, it will put a lot of pressure on future Fed chairs and may affect their decision-making freedom. In order to protect the Fed chairman’s ability to make decisions without political pressure, Powell believes that it is important to be prepared for such a possible legal conflict, even if he may personally incur the costs of it.

The issue of the Federal Reserve’s independence is not new.

Since the high inflation of the 1970s, the Federal Reserve has placed great importance on its independence. At that time, U.S. President Nixon pressured the Federal Reserve to ease monetary policy, which resulted in severe inflation. The high inflation issue was ultimately curbed through the economic recession of the early 1980s.

Although the independence of the Federal Reserve is not explicitly defined by law, this historical lesson has led to a consensus among the Federal Reserve, the president, and Congress that the Federal Reserve should have a considerable degree of independence to ensure it can maintain low inflation and a healthy job market.

By the 1990s, many other countries’ central banks also began to strive for greater independence, allowing them to set interest rates without government intervention, so they could better serve the long-term development of the economy.